The Value of Mexico’s Peso

Mexico’s peso has had a rocky history against the US dollar. Periods of stability have been followed by periods of great turmoil and resulting devaluations.

An irony – economists would say corollary – is that the only times the peso has gone through periods of appreciation against the dollar has been in recent years when it was allowed to float freely, with no exchange controls in place, few or no price controls in the domestic market, and no restrictions on withdrawing capital or profits.

After briefly reaching 11.50 to the dollar in the late 1990’s, the peso had several years of ups and downs, gaining to less than 10 to the dollar just before the global economic crisis of 2008. Since that crisis originated in the US, the effect on Mexico was much greater than it was on other countries which have fewer or smaller trade and investment ties.

The currency went from 10 in August of 2008 to more than 15 in March of 2009, as investors sold Mexican stocks and bonds, often for cash to change back to dollars in order to meet other obligations.

Mexico survived the crisis largely intact, and the peso has recovered about half of its lost value. The exchange rate is now close to 12.50 to the dollar and it’s widely thought that it will be more or less stable over the next year or so. That’s not to say it won’t have periods of ups and downs, but a guess of “between 12 and 13” would be roughly in-keeping with what currency experts are predicting. There are varying views on whether the peso is undervalued at the present exchange rate. Different economists use different criteria to calculate what they think a currency’s fair value ought to be, and therefore come up with different results.

As a floating currency, the peso changes from day to day, and although it’s the large, multi-million dollar transactions by banks and big corporations that define the rate, small retail operations at bank branches and exchange houses are based on those inter-bank shifts. Usually they are updated in the mornings, although at airports and other places where business is brisk, it could be adjusted to reflect the day’s moves.

The vast majority of peso trading is done against the US dollar, and retail rates against other currencies such as the British pound, the Canadian dollar or the euro, are simply a combination of the two rates, or “currency pairs” as they are known in the trading world. So if the Canadian dollar rises relative to the US dollar, it would also be more expensive to buy Canadian dollars with pesos, unless the peso had also risen against the US dollar. There are no fixed rules about that. Sometimes the peso can appreciate while others depreciate against the US currency, other times they will move in the same direction. It can depend on many different things. Occasionally the reasons for the change are local, and other times they are global.

These currency trends tend to last for weeks or months and then the people doing the trading switch their attention to something else that’s “moving the market.” Things which affect the peso include world oil prices, US economic growth, money that Mexicans in the US send home to their relatives and, to a smaller extent, money that foreign tourists bring in to the country.

In the last half century or so, different governments have applied different measures for managing the exchange rate, depending on their perception of the country’s needs at the time. After a series of devaluations in the 1970s and 1980s, some major, some controlled, in the early 1990s a decision was made to knock three zeroes off the currency, so that 1,000 pesos became one new peso.

Later the word “new” was dropped and they became just pesos again.

From 1954 to 1976, the peso was held at a fixed rate of 12.50 (old pesos) to the dollar. A devaluation in 1976 was followed by long period of different exchange controls which included outright restrictions at times, multiple rates at others, and a system of exchange bands that allowed a steady but gradual depreciation. The economic blowout in December 1994, when the country’s reserves had been depleted following a year of capital flight, led to a free floating exchange rate that has been maintained ever since, with the central bank only intervening in times of extreme distress in markets.

Recently, restrictions have been placed on foreign exchange transactions involving cash, or deposits of dollars into Mexican bank accounts of businesses and individuals. The measures were announced as part of efforts to contain money laundering. The foreign currency cash transaction limits – US$1,500 a month for foreign tourists and people without bank accounts – haven’t exactly delighted businesses in tourist areas. Mexico’s banks have said they plan a big expansion of ATMs, particularly in tourism and border areas, to make it easier for visitors to obtain pesos. They also say they will increase retail exchange services at bank branches.

Where this could affect tourists is at shops and other businesses that accept dollars in cash, since they would then have problems depositing the money into their accounts. Bankers say they’re working on a system that would allow dollars to be deposited as electronic transactions for purchases up to $100. How this will end up working isn’t clear at all, and it’s quite likely that some shops that once happily accepted dollars may stop doing so.